What is a recession? Is Europe already in one? It’s not that easy to tell

Everybody in Europe is talking about one thing: recession.

The threat of an imminent and profound recession is casting a dark shadow over the entire continent, with Russia’s war in Ukraine and the global energy crisis merging in a perfect storm.

Traditionally, a recession has been defined as two consecutive quarters of GDP contraction. But as economies become more globalised and interlinked, the classic definition has proven too narrow and too limited.

Focusing on GDP stats offers a simple, fast and easy way to announce recessions, says Grégory Claeys, a senior fellow at Bruegel, a Brussels-based think tank, but the method is overly “systematic” and reliant on numerical estimations, which can be revised at a later stage.

“It takes time to call a recession,” Claeys told Euronews, pointing out other key factors that should be taken into consideration, such as industrial production, employment and trade.

In fact, the United States registered two quarters of GDP decline this year but did not officially characterise that period as recessionary.

The reason? Other aspects of the economy were doing just fine: jobs increased, wages grew and foreign investment kept pouring into the country.

The European Union, which is geographically more exposed to the ripple effects of the Ukraine war and the disruption in the energy market, is showing more of a mixed picture.

On the one hand, employment remains healthy at an all-time high. Vacancies are still available for applicants and salaries have risen at an above-average rate. 

But on the other hand, troubling signs are emerging.

Persistently high energy prices have fuelled record-breaking inflation, putting many households and companies under unsustainable financial stress. Families face the prospect of energy poverty when winter comes while businesses scramble to make ends meet and avoid insolvency.

At an international level, the EU, long accustomed to comfortable trade surpluses, is now grappling with a widening deficit, as expensive energy imports turn the balance upside down.

From January to September, the bloc saw a massive trade deficit of €266.6 billion, compared with a surplus of €129.2 billion in the same period last year.

These worrying trends, coupled with uncertainty over the Ukraine war, have led financial institutions and economists to conclude an EU-wide recession is inescapable.

“This is a very unusual crisis because it’s supply-driven. Previous recessions were demand-driven and had problems in the labour market,” Claeys said.

“It’s also different from the COVID-19 crisis, which we knew was temporary because we would eventually find a solution,” he continued, alluding to the vaccines.

“This crisis is about Russia’s blackmail of energy supplies. It’s going to have a long-term impact that will force the EU to change its business model and think more strategically. We cannot buy our way out of this crisis.”

Watch the video above to learn more about recessions.

Read the full article Here

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